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Business News/ Market / Stock-market-news/  Goldman sees bull run over as returns trail stocks
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Goldman sees bull run over as returns trail stocks

The Standard & Poor’s GSCI Spot Index of 24 commodities lagged behind the MSCI All-Country World Index for six months, the longest stretch since 1998

A file photo of Goldman Sachs in New York. Photo: AFP (AFP)Premium
A file photo of Goldman Sachs in New York. Photo: AFP
(AFP)

Commodities are trailing equities for the longest stretch in almost 15 years as Goldman Sachs and Citigroup Inc. predict the end of the decade-long bull market even as the global economy expands.

The Standard & Poor’s GSCI Spot Index of 24 commodities lagged behind the MSCI All-Country World Index for six months, the longest stretch since 1998. Hedge funds cut combined bullish bets across 18 US raw-material futures by 51% from a 16-month high in September and are bearish on six of them. Commodities will return 1.6% in a year as losses in agriculture and precious metals diminish gains from energy and industrial metals, Goldman said last month.

Investors pulled a record $23.3 billion from commodity funds this year as global equities attracted $182 billion, according to EPFR Global, which tracks money flows. Prices that more than doubled in 10 years spurred expansions at mines, farms and oil fields. Gluts are emerging as the International Monetary Fund predicts global growth of 3.3% this year, from 3.2% in 2012. The group cut last week its estimates for China, the top consumer of metals, grains and energy.

There are times when you probably should be avoiding commodities, and I think this is one of them, said John Stephenson, who helps oversee about C$2.7 billion ($2.61 billion) at First Asset Investment Management Inc. in Toronto. Any time you have a whole lot of inventory and visible supply, prices are going to be under pressure. The real issue for commodities is the source of demand, China, is weak.

Natural gas

The S&P GSCI dropped 3.3% this year, as 17 members of the gauge retreated. Silver led the decline, falling 26%. Corn and gold also entered bear markets in April, joining copper, sugar, wheat, soy beans and coffee. Natural gas is leading the gainers with a 19% advance, while cotton rose 11%. The commodity index is 30% below its record close in July 2008.

The MSCI equity gauge gained 6.4% since the end of December, with the Dow Jones Industrial Average and the S&P 500 Index reaching records last month. The dollar strengthened 3.5% against six major trading partners. Global bonds measured by the Bank of America Merrill Lynch Global Broad Market Index lost 1.5% in May, the most since April 2004.

Commodities are diverging from equities as the supercycle, or longer-than-average period of rising prices, is eclipsed by the supply surge, Jeffrey Currie, Goldman’s head of commodities research in New York, wrote in a report 14 May. The agricultural segment of the S&P GSCI will drop 13% in 12 months as livestock and precious metals lose 4%, he said. Energy and industrial metals will advance 5%.

Domestic consumption

Most commodities will drop this year as China’s economy moves from a focus on infrastructure to domestic consumption and services, Citigroup’s Ed Morse said in a 20 May report. That means investors should pay more attention to supply and demand rather than just broad economic trends, he said. The bank predicted the end of the supercycle in November. UBS AG and Credit Suisse Group AG made similar forecasts this year.

The S&P GSCI more than tripled since the end of 1999, including 11 gains over the past 13 years, setting records in everything from oil to gold to copper. Producers struggled to keep up as China’s economy expanded more than fivefold. That attracted a surge of investment and assets under management totalled $409 billion in March, from $154 billion at the end of 2008, Barclays Plc estimates.

Corn supply

Pessimism about commodities is focusing on the price of raw materials as the pace of growth in consumption slows. China will use 5.2% more copper this year, from a gain of 6.8% in 2012, Barclays estimates. The nation is still using enough copper in cables each month to circle the globe almost 90 times, government data show. It will consume more than one in every five tons of global corn supply this year as its hog herd reaches 447 million animals, six times the US figure.

In the US, where builders use about 400 pounds of copper in a single-family home, sales of new properties in April reached the second-fastest pace since July 2008. Central banks in the US, Europe and Asia are still printing unprecedented amounts of money to boost growth, adding to the almost doubling of global sovereign debt to $23 trillion since the end of 2008, a Bank of America index shows.

Biggest exporter

Supply expansions may fall short of forecasts as bad weather curbs crops in the US, the biggest exporter, and mining is disrupted. Farmers in Iowa, the largest US corn and soy bean grower, had their wettest April and May in records going back to 1873. Freeport-McMoRan Copper and Gold Inc.’s Grasberg operation may be shut for as long as three months after a tunnel collapsed last month. The Indonesian mine is the biggest source of copper after Escondida in Chile, where port strikes have disrupted metal shipments.

The outlook for commodities is likely to be brighter, said Alan Gayle, a senior strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees about $48 billion of assets. The outlook will turn bullish when demand starts moving higher. I’m not jumping in yet with both feet and am going to let the story develop first, which I expect to happen over the next few months.

The International Monetary Fund cut its forecast for Chinese growth this year and next on 29 May. It’s now predicting 7.75%, from an earlier projection of 8% for 2013 and 8.2% for 2014. The US economy grew at a 2.4% annualized rate in the first quarter, the commerce department said 30 May, cutting its previous estimate of 2.5%.

Largest retailer

Cheaper raw materials may boost margins for companies from McDonald’s Corp. to General Mills Inc. to Boeing Co., while keeping inflation in check and allowing the Federal Reserve to continue stimulus. Kraft Foods Group Inc. cut the cost of its Gevalia coffee by 6% last month and Wal-Mart Stores Inc., the world’s largest retailer, is reducing grocery prices. US retail petrol fell 4.5% from this year’s peak in February, American Automobile Association data shows.

Hedge funds and other large speculators are holding a net- long position of 652,708 futures and options across 18 US commodities, from 1.3 million in September, government data shows. Supply will exceed demand for 12 of 18 of the metals and agricultural products, according to estimates from Barclays and Rabobank International.

West Texas Intermediate crude oil will average $90 a barrel this year, from $94.15 in 2012, Citigroup estimates. US inventories reached the highest since 1931 on 24 May, government data shows. New drilling technology is unlocking supplies trapped in shale formations, helping the US meet the highest proportion of its own energy needs since 1986. Crude rose 2.1% in New York trading this year.

Exchange traded

Gold dropped 17%, the worst start to a year since 1982. Holdings through exchange-traded products tumbled 19% to the lowest since May 2011. Bullion will drop this year for the first time since 2000, according to a Bloomberg survey of 38 analysts.

The LMEX index of six industrial metals fell 6.3%. Copper stockpiles tracked by exchanges in London, Shanghai and New York more than doubled in the past year. Production will outpace demand for the first time in four years in 2013, Morgan Stanley predicts. Prices will decline about 6 percent in 12 months, Goldman estimates.

Farmers around the world will harvest the biggest grain and soy bean crops ever, the US department of agriculture estimates. Corn will extend this year’s 22% decline by another 3.2% in six months, as wheat drops 11%, Goldman says.

You have the combination of higher production together with slower growth in China, said Adrian Day, who manages about $135 million of assets as the president of Adrian Day Asset Management in Annapolis, Maryland. For rest of the year, you have a potential surplus of production over demand, which obviously means lower prices.

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Published: 06 Jun 2013, 01:47 PM IST
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